Why you should care

It turns out many countries rich in energy resources don’t always end up that way — rich.

By Simon Constable

The Daily DoseOCT 06 2015

Simonomics: a regular look at the global economy from a former staff columnist at The Wall Street Journal.

You have just discovered a sizable natural gas field. Actually, not sizable but what could be the world’s largest. It happens to be located ideally enough off the coast of Egypt, a growing energy hub, and it may hold up to 30 trillion cubic feet of gas. Do the math, and at current European prices, it’d be worth roughly $200 billion, or more than two-thirds the size of Egypt’s entire economy.

You can hear that Bangles song — “Walk Like an Egyptian” — can’t you? Or at least, they’d better be dancing in the street there with this kind of news.

But of course, this is the world of energy, an Alice in Wonderland nightmare that can make absolutely no sense. Demand can rise, and still prices can fall. Or countries too dependent on it (read Venezuela or Russia) can find themselves with little to fall back on. Which brings us to what this latest discovery will really mean to Egypt. Will it be its savior? Will it make Egypt rich?

The news actually isn’t very good. In fact, already many are saying it won’t help the country much. For starters, if the energy revenues lift the Egyptian pound’s value, “it will be more difficult for domestically produced Egyptian goods to find foreign markets,” warns George David Smith, a professor of international business at New York University’s Stern School of Business. He and others have also pointed out that the country has traditionally been blighted by corruption. “We’ve not had a regime in recent memory that has been more interested in economic growth than it has been in staying in power,” says Smith.

The gas discovery in Egypt by Italian energy company Eni could actually end up being an enormous boon for other countries.

There are exceptions in this global game of energy producers, of course. Norway, for one, has set up a sovereign wealth fund as a way to stash away petro-dipped money from the good years and invest in the country’s future. And oil-rich Abu Dhabi, which has long driven the energy-dependent economy of the United Arab Emirates, has a similar fund as well. Both hold hundreds of billions of dollars in investments, according to data from the Sovereign Wealth Fund Institute.

What’s more, the major gas discovery in Egypt by the Italian energy company Eni could actually end up being an enormous boon for other countries — in the European Union. “Certainly it will benefit the Europeans,” says Peter Morici, a professor of business at the University of Maryland, College Park. That’s because of one of the major disadvantages that the Europeans have: Their gas just isn’t as cheap as it is for Americans. In fact, natural gas in Europe is around two and a half times more expensive than it is in the U.S., partly because Europeans have been more reluctant to exploit shale gas deposits. As a result, not only are prices high, but the EU is reliant on an increasingly belligerent Kremlin for a major part of its energy needs.

Indeed, if Eni’s gas find produces a mere 2 percent of the total resource — a normal assumption — it would easily fulfill about 10 percent of the EU’s imported natural gas requirements, according to estimates from the Washington, D.C.-based Energy Policy Research Foundation. A new source of energy would allow the EU to lessen its reliance on Russia and benefit from prices that would decline because of the additional supply.

So what happens to the money that Egypt earns from this resource? Some of it will undoubtedly stay in Egypt, but some will also flow to Europe, where it will be used to buy consumer goods such as cars and washing machines and other things that Egyptians might want. In the end, the sad irony is that Egypt may just stay poor, while nearby Europe, already rich by any reasonable measure, may get even richer.